Land Use Regulation as a Barrier to Entry: Evidence from the Texas Lodging Industry

In the U.S., local governments regulate private land use mainly through zoning. By creating a barrier to entry and lessening competition in local business markets, their regulation has the potential to generate a distortion. This paper assesses the empirical relevance of this hypothesis using microdata on midscale Texas chain hotels and land use regulation data collected from their local municipalities. I construct a static entry model of midscale hotel chains. By endogenizing their entry decisions, the model explicitly considers hotel chains’ reactions to the stringency of land use regulation. Reduced form regressions indicate that local markets under stringent regulation tend to undergo fewer entries. To identify the extent to which high entry cost due to stringent land use regulation explains this negative correlation, I estimate structural parameters of the entry model by using a recently developed nested pseudo likelihood algorithm. To verify the robustness of my results, I also employ a bound estimator that is consistent under weak conditions. Estimation results indicate that imposing stringent regulation increases cost enough to affect hotel chains’ entry decisions. A decrease in the total ∗Department of Economics, University of Toronto. Address: 150 St. George Street Toronto ON, M5R2L9 Canada. Email: [email protected]. I am grateful to Pat Bajari and Tom Holmes for their patience and advice. I also wish to thank Victor Aguirregabiria, Kyoo Il Kim, Ichiro Obara, Minjung Park, Amil Petrin and Bob Town for helpful discussions and Yoshifumi Konishi, Julia Thornton and Michael Walrath for giving me detailed comments. I also thank participants of the applied micro seminar at the University of Minnesota. Of course, all remaining errors are my own.